The Financial Incentive for Apple to Make an Electric Car is Huge

By John Martellaro

Mar 12th, 2015 4:15 PM EDT

Several articles have been written lately about whether Apple could actually make decent money with an electric car. The matter involves some industry numbers and assumptions about how well Apple can do in the market. I thought I'd do some math and make some predictions.

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One of the valuable questions that's been asked is how could Apple expect to do in the automobile market in terms of market penetration and how would the corresponding profits compare to Apple's other products?

A secondary question, which I have not seen is what the prospects are for the rest of the Apple product line compared to the future of cars. For example, we may not always have iPads and iPhones in their current form, but we'll always need some kind of transportation, especially in the car crazy U.S. market.

In the end, if Apple thinks it can make a lot of money, the company can likely solve every other problem it would face regarding marketing, sales and service.

Using the Business Insider number for the global automobile market, the annual sales are about 80 million with US$1.6 trillion in sales.

Yoni Heisler (#1 above) does a very good analysis of BMW and found that the company netted about $4,442 per car in profits in 2013. It's reasonable to assume that Apple could do as well or better.

And now we get to the tricky part: Estimating what percentage of the global market Apple could capture. Article (#2 above) suggests 10 percent. I think that's wildly optimistic for starters. It might be a stretch goal down the road. Recall, when Steve Jobs launch the iPhone, he modestly suggested Apple should shoot for one percent of the global cell phone market. Apple has ended up doing much, much better.

However, one might surmise that Apple would, by virtue of its expertise in various areas like hardware and software integration, advanced manufacturing, battery technology, and its reputation for trustworthiness, expect to eventually capture 5 percent of the global market (#3 above) after first launching in the U.S. That's brazen, but Apple is never humble in its goals.

Five percent of 80 million cars times $5,000 profit per car is $20 billion profit annually. That's not much, but the potential, I think, as cars become autonomous and the level of trust in the car must escalate, looks good in the long run.

Of course, this pales in comparison to Apple's quarterly revenue and profits for the iPhone today. In just one quarter, Q1 2015, the iPhone generated $51 billion in revenue, about 68 percent of of Apple's total revenue. 68 percent of the 18 billion in profits is about 12 billion in just in one quarter.

The one quibble I have with Mr. Heisler's article (#1) is the comparison to Tesla. By looking at Tesla's meager annual sales (about 32,000 in 2014) and then multiplying by what seems to be a generous factor of 10, Mr. Heisler may have vastly underestimated Apple's own judgment about it's global prospects. After all, if Apple has apparently no interest in acquiring Tesla, perhaps Apple executives think they can do vastly better. I think they can.

There are many other important issues raised by Mr. Heisler, but if Apple's sees an opportunity, it can also solve the problems of how to sell and how to bring its own unique value to the car market. Apple has vastly more financial resources than any other car company. More importantly, Apple knows how to obtain a generous ROI with its cash.

Closing Thoughts

In my opinion, one of Apple's challenges is to predict how all technology markets will evolve. It could be that, some day, the iPhone will get rolled into a much more powerful Apple Watch that will have a mechanism to project suitably large images. Remember, no physical manifestation of technology lasts forever. Think audio cassettes. Think iPod.

Similarly, it could be that autonomous cars will proliferate quickly, and the level of trust and security required for a modern electric car in 2020 will be an enormous challenge for all car makers. Considering how car companies have fared in the past with safety, recalls, and the balace of human lives versus costs, I wouldn't be surprised to see Apple bring a fresh approach.

Increasingly, there are reasons to lose trust in our cars. They track our whereabouts, habits and speeds and log the data for maintenance records. No one knows who really owns that data. Modern cars with their extensive digital user interfaces and touch screens require, I think, too much eyeballs "inside" instead of eyeballs "outside." Finally, like your computer, there's an ongoing battle between the good guys and the bad guys to hack into your car.

In the future, autonomous cars will be even more complicated and the software that makes decisions about how follow the road and avoid unexpected obstacles (and people) will make today's cars look like windup toys. What company, in the 2020-2040 era will we trust to protect our car, our data and our safety? What company will we trust to help us be good stewards of the planet?

I'm guessing Apple Executives want something vastly better for us and themselves, and they're seriously thinking about a new vision for our future. As always, it will be an honorable vision that can also make Apple a lot of money.